Neil Barofsky, author of the book Bailout: “The same incentives that led to the 2008 crisis are still in place today and in many ways, the situation is worse. We have a financial system that concentrates risk in just a handful of large institutions, incentivizes them to take risks, guarantees that they will never be allowed to fail, and ensures that executives will never be held accountable for their actions.” (source)
At SwitchYourBank.org, we aim to break up the concentration of banks by encouraging people to support local lenders.
This info-comic, How Banks Became Casinos, offers a bird’s eye view of how banking has become more dangerous and risky in recent years. If you want to understand more about the situation beyond this simplified info-comic, we recommend these posts:
Neil Barofsky, former Inspector General for TARP: “Pretending that Dodd-Frank solved all our problems, as some Democrats do, or simply saying that big banks won’t be bailed out again, as some Republicans have suggested, is unrealistic. Congress needs to proactively break up the “too big to fail” banks through legislation.”
Brooksley Born, former chairman of the CFTC: “too big to fail is the primary problem” and “the Glass-Steagall Act, before it began to be eroded by the bank regulators, was a good idea.”
James Bullard, president of the St. Louis Fed: “We do not need these companies to be as big as they are … We should say we want smaller institutions so that they can safely fail if they need to fail.”
William Dudley, president of the NY Fed: “We are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society.”
Camden Fine, president of ICBA: “Consolidation in the banking industry and the emergence of financial institutions with explicit government guarantees against failure haven’t exactly contributed to an economic boom. It’s been just the reverse—they triggered an economic collapse.”
Richard Fisher, president of the Dallas Fed: “Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size—more manageable for both the executives of these institutions and their regulatory supervisors.”
We don’t typically look to Gawker for opinions about the Wall Street banks, but Hamilton Nolan has a good piece there called “It’s Time to Break Up the Big Banks.” It’s worth reading in it’s entirety, but we particularly liked this quote (pictured above): “The tendency of a few massive companies to monopolize industries is good for the companies, but bad for you, the consumer.”
It’s a simple concept, but if more people realized just how bad these monopolies are (did you lose any pension money during the financial crisis? are you a taxpayer who has to contribute to the bailouts?), they would be acting more boldly to reform Wall Street.
Nolan also quotes a section from Nassim Taleb’s The Black Swan, which was published in 2007 and which we recommend. Before the financial crisis struck, Taleb warned that our concentrated banking system would lead a severe fiasco. He was right. Here’s the quote from the book: “We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogenous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur… I shiver at the thought. I will rephrase here: we will have fewer but more severe crises.”
SwitchYourBank.org is, at its core, a call to return to the “diverse ecology” of small lenders. The Wall Street banks are bigger than they were in 2007, and they’re still flying high with risky derivatives trades. It’s time to end the status quo.
President Obama didn’t mention a single thing about Wall Street prosecutions or “too big to fail” in the 2013 State of the Union address, which is somewhat startling after the Lanny Breuer fiasco. To recap: A PBS Frontline documentary showed that the Department of Justice has been completely soft on prosecuting Wall Street crime, and the day after, Lanny Breuer, the head of the crime division, stepped down.
And by not mentioning a single thing about it, President Obama essentially solidified the idea that the statute of limitations for crimes related to the financial crisis will hit before anyone is prosecuted. We’re guaranteed, it seems, a two-tiered justice system, where “too big to jail” is law.
In his 2012 speech he did mention these things, but his action since last year has been mostly weak. Wall Street still plays by its own set of rules, they can still make risky bets with customers’ deposits, and there have still been zero prosecutions of Wall Street executives.
Here’s the passage from the 2012 speech:
I will not go back to the days when Wall Street was allowed to play by its own set of rules. … if you’re a big bank or financial institution, you are no longer allowed to make risky bets with your customers’ deposits. …
We will also establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments. …
And tonight, I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.
It’s tough talk, but as we saw in the PBS Frontline documentary, “The Untouchables,” the effort to enact justice has been completely paltry.
Sheila Bair, former FDIC chair, said that the problems have not been resolved in a recent Bloomberg interview: ”What troubles me most is that we still haven’t fixed the problems that we knew were problems leading up to the 2008 crisis.”
We’d like Obama to join the many who’ve spoken out forcefully about breaking up the banks, including the six senators below:
Unfortunately, it doesn’t look like this will happen.The Hill went so far as to claim that “in the push to squelch the “too big to fail” chatter, the banking industry’s biggest ally might be President Obama.”
It’s not an empty claim, either. Here’s their reasoning:
The [Obama] administration contends that bank bailouts are a thing of the past, and that watchdogs will soon have the tools they need to take apart ailing financial institutions with minimal collateral damage.
Wall Street couldn’t agree more.
Of course Wall Street couldn’t agree more. The big banks have gotten bigger since 2007, and Dodd-Frank won’t make them smaller. What’s worse, the megabanks are now unraveling the few derivatives regulations that Dodd-Frank imposed, essentially neutering key aspects of the bill.
So Wall Street executives are quite happy with the status quo, as happy as they could hope to be.
This needs to change. If we keep the status quo on Wall Street, we’ll only increase the chance that we’ll face another crisis and a “Wall Street first” response. We can’t let that happen. Too many people have been brutalized by the last crisis with unemployment, lost pension funds, foreclosures, etc. We’ve got to demand real reform.
To this end, six Senators—Vitter, Warren, Corker, Sanders, Collins, and Brown—have proposed efforts to end “too big to fail.”
We support these Senators and wish the President would join them. In the meantime it seems like the best we can do is to continue to urge people to act against Wall Street and switch to a local lender. Help us spread the message!
According to a USA Today/American University review, banks that received TARP money received what was essentially a TARP bonus. That is, they funneled the money to employees at a much higher rate than those who didn’t receive TARP money. What’s perhaps even more important is that the banks receiving TARP money also lowered their lending rates dramatically during the same time period.
In other words, these banks raised employee pay and lowered lending rates. Here’s exact data from the USA Today article:
• Lending fell. The amount of loans outstanding to businesses and individuals fell 9.1% for the 12 months ending Sept. 30, 2009, at banks that participated in TARP compared with a 6.2% drop at banks that didn’t.
• Employee pay rose. Average pay at banks getting aid rose 9.4% in the program’s first year. By contrast, non-TARP banks increased salaries 1.8%.
It would be one thing if these banks hadn’t increased lending because they simply didn’t have the fiscal strength to do it, but for them to use money to increased employee pay instead of increasing lending seems like a misuse of TARP funds (which were purportedly supposed to be funds that eventually came back into the economy and helped average people). Matt Taibbi gives some key details here about how big institutions got around giving the employee TARP bonus, even though they weren’t supposed to:
Banks could apply to the Fed and other regulators for waivers, which were often approved (one senior FDIC official tells me he recommended denying “golden parachute” payments to Citigroup officials, only to see them approved by superiors). They could get bailouts through programs other than TARP that did not place limits on bonuses. Or they could simply pay bonuses not prohibited under TARP. In one of the worst episodes, the notorious lenders Fannie Mae and Freddie Mac paid out more than $200 million in bonuses between 2008 and 2010, even though the firms (a) lost more than $100 billion in 2008 alone, and (b) required nearly $400 billion in federal assistance during the bailout period.
It’s examples like these that make us think that there was something slightly fishy about TARP. Whether the bailouts should have happened in the first place is a contested issue, but whether these institutions found ways around the rules of the bailouts isn’t.
We like this Barry Ritholtz quote (source) because it succinctly captures how incredible the lack of prosecution on Wall Street has been since the financial crisis.
Ritholtz was also part of a 15-minute Bloomberg interview that sums up a central reason why TooBigHasFailed.org exists: to inform people about the dangers of Wall Street excess. The video is somewhat technical, so we’ve included a summary and some excerpts below.
Summary:
1. The global derivatives market is enormous—5 to 10 times global GDP, depending on how it’s measured.
2. The vast bulk of derivative dealings happen on Wall Street. These banks are mostly very cautious and have positions on both sides of each bet. But the shear scale of the derivative market means that a slight mistake could totally wipe out a bank’s capital.
3. In 2000 a law passed that declared that derivatives were to be totally unregulated. This law should be reversed so derivatives can be treated like every other financial instrument. Until that law is repealed regulators will continue to have a very difficult time understanding the total derivatives exposures in the market.
4. Wall Street doesn’t want derivatives regulated because these transactions bring in huge profits, and even “subsidize the rest of the business,” according to Whalen.
5. It’ll take another crash for us to finally see true regulation.
Note: The hope of SwitchYourBank.org is that the public will become informed enough about this issue to demand reform before another derivatives-related crash hits.
Excerpts:
INTERVIEWER: Is size alone [of the derivative market] reason to embark on a big regulation campaign?
WHALEN: Well it is, because ultimately these are gaming instruments. Since the size of the market is so much larger than the underlying economy … then by definition it’s speculative. So that’s the first point. Going to Barry’s point, look at the large bank holding companies that are the major dealers—JPMorgan. A 7-basis point move in their aggregate derivative book wipes out their capital. 7-basis points. So when you look at the scale of the activity, the bank at JP is almost trivial compared to the derivatives book. The derivatives book is, in fact, the driver of the business, and whether you’re talking about the London Whale, or customer’s activities, whatever it is, these people are playing in illiquid, highly-levered instruments that most people don’t fully understand in terms of their performance, so by definition it’s speculative.***
RITHOLTZ: You’re taking two parties who hopefully both are solvent, but we really don’t know, and they’re making a bet as to a future outcome of something that has pretty significant ramifications. If it’s about something that you have a vested financial interest in, well clearly that’s an insurance product. You can insure your own home, you can insure your building, you can insure your portfolio, and therefore there should be some insurance oversight of this. On the other hand, if I’m speculating on his house, well then that’s gambling, and it’s up to the gambling commission to make sure that all parties leave the table and the trade actually goes through.
***
WHALEN: Obama understands perfectly, and so does Tim Geithner because, as Barry said, Geithner’s the guardian of Wall Street. But the thing is, the big banks aren’t that profitable. The supernormal returns that they earn on derivatives subsidize the rest of the business. And this has been the case for 20 years.
***
RITHOLTZ: There’s nothing wrong with getting rich slowly. You open up a reasonable-sized bank, you have a few branches—it’s a nice business. You’re just not going to get wealthy overnight.
WHALEN: But Wall Street doesn’t want that. Wall Street has turned the top 5 banks into a relatively high-beta, high-volatility place. … To Barry’s point, [in] the old-fashioned banking business, the common equity was a bond. People would keep that stock for generations, they didn’t even think about it because it was an income play, it was a credit play. It wasn’t a trading vehicle. So this whole notion that the financials should be 20% of the S&P 500, and they should have earnings north of XYZ, doesn’t fit that old world. That’s part of the problem.
A study released recently from the Project on Government Oversight (POGO) exposes the revolving door between Wall Street and the Securities and Exchange Commission (SEC), one of Wall Street’s primary overseers.
The key finding of the POGO study is that from 2001 to 2010, over 400 SEC employees filed disclosure forms saying they would be representing an employer or client to the SEC. But the reality of situation could be much worse, since former SEC employees are only required to disclose this information during the first two years after they leave the agency. In other words, many employees of the SEC leave the SEC to defend the very clients they were supposed to be overseeing in the SEC.
It goes without saying that this situation represents a conflict of interest. Since investment banks can offer future employment (read: big payouts) to current SEC employees, it’s likely that current SEC employees are somewhat hesitant to over-irk the investment banks. Better to play it safe and not jeopardize future payouts.
Lynn Turner, a former SEC employee who’s totally aware of how corrupt the system has become says, “You take one of these jobs [at the SEC], and you’re fit for life.” The implications of the situation aren’t good: Turner scoffs at the idea that the SEC properly oversees investment banks: “I think you’ve got a wrong assumption—that we even have a law-enforcement agency when it comes to Wall Street.”
Part of the reason this revolving door continues is that American citizens continue to support Wall Street firms like JPMorgan Chase, Citigroup, and Bank of America. It’s admittedly a very small act to switch from the megabanks to a local lender, but if citizens were to act collectively, we might see real reformsurface and put an end to the concentrated moneyed interests on Wall Street and the revolving door they’ve created. Local lenders aren’t the ones offering big payouts to former SEC employees. Wall Street firms are.
This Neil Barofsky Jon Stewart interview is full of justified railing against the megabanks and their Washington allies.
Barofsky talked about the intense pressure from the megabanks after the financial crisis and how it led to Wall Street getting preferred treatment over homeowners. Treasury sold the bailout under the impression that 4 million homeowners would get help, but when the time to do that arrived, they changed the goal to “make 4 million offers.” This way they didn’t have to really help homeowners. Meanwhile the banks got billions of dollars to stay afloat and in many cases maintain their bonuses.
Why are things the way they are? Barofsky answers this as well. He says,
In a lot of ways, the largest banks did and still do hold a gun to our head. They hold us hostage, they can’t be indicted because if you bring criminal charges against them, you’ll bring them down and that will bring down the entire system. You can’t get too tough with them for the same reason. You can’t break them up because it’ll tear down the system. It’s all these justifications. Not that they’re necessarily true, but it’s all preserving the status quo and keeping their power—their political power, which is so strong in Washington—intact.
Barofsky summarized perfectly the reason taking action against the megabanks is so essential: If we keep the status quo, the Wall Street firms will continue to act the same way they have in the past few decades, causing fiasco after fiasco, privatizing gains and socializing losses.
We’ve watched a lot of interviews with Neil Barofsky since his book Bailout was published (a book that’s on our reading list), and we’ve got to say that this is his best one yet.
The Matt Taibbi Reddit AMA this morning was spectacular. Taibbi responded to our question about what direction he thinks activists should take regarding the problems on Wall Street today. Specifically, he wrote:
Breaking up the banks is the big thing. That should be the Holy Grail of activist goals. Everything flows from the TBTF problem. If that can be accomplished, we’re off and running. And it’s not farfetched. There are a lot of people even in DC coming around to the idea.
We strongly agree with this sentiment. While we want to see citizens act by switching from the megabanks, we’re under no illusion that this in itself will be sufficient. When citizens switch banks, they are signaling to Wall Street that they won’t put up with their garbage. But even if a hundred thousand people switched, it wouldn’t be enough in itself to stop what Wall Street is doing.
However, every person who publicly protests the megabanks by switching makes this megabank breakup more likely, and to that end switching is worthwhile. If more people switch from the megabanks in public protest, more people in Congress will be willing to break up the megabanks because they’ll know that’s what their constituents want.
So we strongly endorse the idea of breaking up the megabanks and ending “too big to fail.”
Which politicians are coming around to this idea?
Before this morning, we only had 30 people on our list of those who’ve spoken out about “too big to fail,” and few of them were politicians. After seeing Matt’s words on Reddit, we wanted to gather a sampling of people in DC who are coming around to the idea of breaking up the banks.
We realize that when it comes to politicians, words don’t mean as much as they should. But at least these people have spoken out about the issue, and they deserve applause for going on record saying what they’ve said.
Sen. Sherrod Brown, Ohio: “Allowing Wall Street megabanks to grow so large and over-leveraged that their downfall would send ripples throughout our entire economy isn’t fair to taxpayers and it isn’t fair to mid-sized and community banks who don’t enjoy the implicit guarantee from the Treasury Department that comes with too big to fail status.”
Sen. Maria Cantwell, Washington: “So much U.S. taxpayer-backed money is going into speculation in dark markets that it has diverted lending capital from our community banks and small businesses … It’s time to go back to separating commercial banking from Wall Street investment banking.”
Sen. Robert Casey, Pennsylvania: “These banks are such big institutions and have tentacles reaching so far into the economy that the failure of one or more of these institutions can wreck the economy. That is why I am supporting an amendment to limit the size of the mega-banks and end “too big to fail.”
Rep. Scott Garrett, New Jersey: “We cannot allow “Too-Big-To-Fail” to take root in our non-bank financial institutions. These institutions must not be allowed to be captured in the same regulatory scheme that will protect them from market forces, stifle innovation and creativity in the broader financial sector, and ensure taxpayers remain on the hook for their failure.”
Sen. Ted Kaufman, (former) Delaware “I’d like to return to Glass-Steagall. But even if you did break these banks apart, you need to place caps on their size.”
Rep. Tom Harkin, (former) Iowa: “It is clear to me that going back to the Glass-Steagall era regulations will help end the problem of ‘too big to fail’ and will restore order to our financial sector.”
Jon Huntsman, former governor of Utah: “Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis.”
Sen. Mike Lee, Utah, referring to Glass-Steagall, “Hardly ever will you hear me say, ‘yeah, I think we ought to bring back the 1933 law.’ This is one of those very rare instances when I think, ‘yeah, we should probably bring back the 1933 law’… I think we need to bring that law back.”
Sen. Carl Levin, Michigan: “What banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making.”
Sen. John McCain, Arizona: “No single financial institution should be so big that its failure would bring ruin to our economy and destroy millions of American jobs. This country would be better served if we limit the activities of these financial institutions.”
Sen. Jeff Merkley, Oregon: “Our banking system and our economy do better if bad bets blow up only those who make the bets and not the entire banking system that fuels economic growth and job creation.”
Rep. Brad Miller, (former) North Carolina: “We can just break the biggest banks up. A bank would almost certainly be easier to understand, both for the bank’s managers and for safety and soundness regulators.”
Sen. David Vitter, Louisianna: “Our bill takes the federal government out of the business of picking winners and losers in the economy because they’re too-big-to-fail.
Sen. Elizabeth Warren, Massachusetts: “A new Glass-Steagall would separate high-risk investment banks from more traditional banking. It would allow Wall Street to take risks, but not by dipping into the life savings and retirement accounts of regular people.”
In an otherwise boring Senate Banking Committee hearing this morning (full of empty phrases like “let me get back you” and “I’ll have to check on that”), Elizabeth Warren asked a pointed question: How many of the officials there had actually taken a Wall Street firm to trial? The few people who responded to her question skirted it, until Warren pressed them harder on the issue to discover what we all knew was the case: zero.
Since trials force far more information to surface than settlements do, the public would better understand what’s going on in these Wall Street firms if the Wall Street firms went to trial. But because we haven’t had any trials, the info remains undisclosed.
Warren summed up her position by saying, “I’m concerned that too big to fail has become too big to take to trial.”
And that’s the problem, exactly. So long as Wall Street firms avoid trial simply because of their size, we have a two-tiered justice system. Until Congress and government officials feel the pressure to change the status quo, the best hope for reforming this unethical system is for citizens to proactively switch from a megabank to a local lender. Otherwise, the unethical behavior will continue and will eventually spill over and affect all of us once again in the form of another fiscal fiasco.
Here is the video, with the exact quote.
Okay, we’ve got multiple people here. Anyone else want to tell me about the last time you took a Wall Street bank to trial? [No response.] You know, I just want to note on this: There are district attorneys and US attorneys who are out there everyday squeezing ordinary citizens on sometimes very thin grounds and taking them to trial in order to “make an example,” as they put it. I’m really concerned that too big to fail has become too big for trial.
Here’s the transcript:
WARREN: I want to ask a question about supervising big banks when they break the law, including the mortgage foreclosures, but others as well. You know, we all understand why settlements are important, that trials are expensive and we can’t dedicate huge resources to them. But we also understand that if a party is unwilling to go to trial, either because they’re too timid, or because they lack resources, that the consequence is they have a lot less leverage in all of the settlements that occur.
Now, I know there have been some landmark settlements, but we face some very special issues with big financial institutions. If they can break the law and drag in billions in profits, and then turn around and settle, paying out of those profits, they don’t have much incentive to follow the law.
It’s also the case that every time there is a settlement and not a trial, it means that we didn’t have those days and days and days of testimony about what those financial institutions had been up to.
So the question I really want to ask is about how tough you are about how much leverage you really have in these settlements? And what I’d like to know is, tell me a little bit about the last few times you’ve taken the biggest financial institutions on Wall Street all the way to a trial?
(APPLAUSE)
Anybody?
Chairman Curry?
CURRY: To offer my perspective…
WARREN: Sure.
CURRY: … of a bank supervisor? We primarily view the tools that we have as mechanisms for correcting deficiencies. So the primary motive for our enforcement actions is really to identify the problem, and then demand a solution to it on an ongoing basis.
WARREN: That’s right. And then you set a price for that. I’m sorry to interrupt, but I just want to move this along.
It’s effectively a settlement. And what I’m asking is, when did you last take — and I know you haven’t been there forever, so I’m really asking about the OCC — a large financial institution, a Wall Street bank, to trial?
CURRY: Well, the institutions I supervise, national banks and federal thrifts, we’ve actually had a fairly fair number of consent orders. We do not have to bring people to trial or …
WARREN: Well, I appreciate that you say you don’t have to bring them to trial. My question is, when did you bring them to trial?
CURRY: We have not had to do it as a practical matter to achieve our supervisory goals.
WARREN: Ms. Walter?
WALTER: Thank you, Senator.
As you know, among our remedies are penalties, but the penalties we can get are limited. And we actually have asked for additional authority — my predecessor did — to raise penalties. But when we look at these issues — and we truly believe that we have a very vigorous enforcement program — we look at the distinction between what we could get if we go to trial, and what we could get if we don’t.
WARREN: I appreciate that. That’s what everybody does. And so, the really asking is, can you identify when you last took the Wall Street banks to trial?
WALTER: I will have to get back to you with the specific information, but we do litigate and we do have settlements that are either rejected by the commission, or not put forward for approval.
WARREN: OK. We’ve got multiple people here. Anyone else want to tell me about the last time you took a Wall Street bank to trial?
You know, I just want to note on this, there are district attorneys and U.S. attorneys who are out there every day squeezing ordinary citizens on sometimes very thin grounds, and taking them to trial in order to make an example, as they put it. I’m really concerned that Too Big Too Fail has become Too Big For Trial. That just seems wrong to me.
